Tests show inferior treatment of minority business owners at banks, and data shows a steep decline in government-backed lending to black entrepreneurs

Better-qualified black and Hispanic testers who shopped for small business loans at Los Angeles area bank branches were treated worse than less qualified white testers, a new study found.

The study, from the National Community Reinvestment Coalition (NCRC), also found steep declines in government-backed lending to black business owners between 2008 and 2016.

Together, the tests and data reveal a troubling pattern of disinvestment and discouragement to small businesses as a whole and inequitable treatment for black and Hispanic entrepreneurs in particular.



The study adds to a growing body of evidence, including a report released last month from the New York Federal Reserve Bank, that disparity in small business lending is widespread, and that banks and regulators are not doing enough to solve it.

“What this report shows us is that there is still a lot of bias at the individual level, and banks must do better to properly train their employees to eliminate this disparity,” said NCRC CEO Jesse Van Tol. “It’s a cultural, civil rights and business problem that should be relegated to history, but instead it’s still a factor in who gets access to capital, and who doesn’t. This is exacerbating the nation’s profound racial wealth divide. Ensuring fair lending is a fundamental requirement for a just economy, and clearly, banks need better anti-racism policies and better training, and borrowers need the government to step up and enforce anti-discrimination laws.”

The study, funded by the W.K. Kellogg Foundation, used a matched-pairs mystery shopping methodology. Researchers set up teams of black, white and Hispanic males who were matched with nearly identical business profiles and characteristics, such as education, age, and attractiveness. They were also trained in the credit-seeking process.

However, the test was designed so that the qualifications of the black and Hispanic testers were superior to those of the white testers. The pairs used the identities designed by the researchers to inquire about small business loans at 60 Los Angeles area bank branches.

The researchers documented 180 mystery shopper interactions and found that in every category pertaining to information requested of the testers, loan officers asked things of the minority testers that they did not ask of the white testers. For example, not one white tester was asked to provide a personal W2 form, while more than 16% of blacks and more than 11% of Hispanics were. Personal W2 forms are not required for a small business loan. Black testers were the only group asked about their education level (5%).

The tests found that while all participants in the mystery shopper tests received poor customer service from bank loan officers, the treatment of black and non-white Hispanics was significantly worse.

The white testers received friendlier customer service, were provided more loan information, were required to provide less qualifying information and were more likely to be asked back to the bank than the better-qualified black and Hispanic testers.

“This study helps answer the question of why the racial wealth divide continues to widen in this country,” said Dedrick Asante-Muhammad, NCRC’s Chief of Race, Wealth and Community. “If people of color can’t access fair lending to start or grow their businesses, they lose out on numerous opportunities to build wealth.”

In only one criterion was it found that black and Hispanic testers fared better than the white counterparts – how often small business loan representatives offered to set up appointments to take the applications.

“In this political climate of deregulation and concerns about overburdening the industry, NCRC’s research shows that banks need more training and supervision, not less,” said Anneliese Lederer, NCRC director of Fair Lending and Consumer Protection. “The ability to access capital is a major hurdle for small businesses to get to the next step. The correct lending product allows a business to transform from being an income supplement to a company that drives economic growth.”

Along with the matched-pair tests, the researchers also analyzed bank lending data from seven cities that have all seen a significant increase in bank deposits since the 2008 Great Recession – Atlanta, Houston, Los Angeles, Milwaukee, New York, Philadelphia and Washington, D.C. In all but one of the cities, Houston, bank loans to black business owners backed by the U.S. Small Business Administration (SBA) declined significantly.

Business owners in wealthier areas received the largest share of loans – 85% in Milwaukee. In fact, in six of seven metro areas analyzed, more than 70% of loans went to middle- and upper-income neighborhoods.

The data analysis also found:

  • The number of bank branch locations declined 10% since 2009, likely affecting small businesses that are highly dependent on local-level banking relationships.
  • Banks have not reinvested the increased capital accumulated after the end of the Great Recession back into small businesses. The most significant difference between deposits and loans occurred in New York, where deposits increased by 100%, but lending decreased by nearly 40%.
  • There are tremendous gaps in black and Hispanic business ownership relative to their population size. Although 12.6% of the U.S. population is black, only 2.1% of small businesses with employees are black-owned. Hispanics are 16.9% of the population yet own only 5.6% of businesses.

“Since 2008 there have been large increases in deposits held by banks in the seven major markets we surveyed. However, there were declines in the number of small business loans everywhere except in Houston,” said Dr. Bruce Mitchell, report co-author and Senior Research Analyst at NCRC. “Small Business Administration guaranteed loans also declined. Hispanic and black business-owners are under-represented compared to their share of the population. For instance, black-owned businesses with employees comprise only about 2% of the total nationally, though the black population is over 12%. It’s troubling to see the number of SBA loans to black entrepreneurs decline as they did after 2008 and not recover.”

The study also adds context to a long-simmering debate about section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1071 called on the Consumer Financial Protection Bureau (CFPB) to gather information from banks on small business lending much like what is required for mortgage lending. However, the CFPB has not implemented this section. The study shows that there is still a significant lack of data that should have been filled by section 1071 implementation.

“This report is further evidence of a scourge of discrimination in lending,” said Rep. Al Green (D-Texas), a member of the House Financial Services Committee and chair of its subcommittee on Financial Institutions and Consumer Credit. “It provides additional empirical evidence of discriminatory lending patterns that are unacceptable in this time and in our nation. NCRC’s research underscores the need to equip regulators with new authorities and effective investigative tools, like the matched pair testing methodology used by NCRC in this study, to enforce the most fundamental premises of the Fair Housing Act. This study shows again that existing federal efforts have yet to end invidious discrimination in lending. And it must end.

“The report further validates the need for the Financial Services Subcommittee on Oversight and Investigations congressional field hearing: Examining Discrimination and Other Barriers to Consumer Credit, Homeownership, and Financial Inclusion in Texas. The hearing, to be held on Wednesday, September 4, 2019, in Houston, Texas, will explore H.R. 149, which is a bill I introduced at the beginning of the 116th Congress,” Green added. “H.R. 149 will authorize funds to prevent housing discrimination through the use of nationwide matched pair testing. The hearing will also explore other possible legislation and legislative ideas to combat the issue of discriminatory lending practices. Mystery testing is fundamental in rectifying this long-seated disparity and violation of the civil rights of black and brown Americans.”

View the full report.

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